Bridge Too Dear
Prof Ian Giddy
In early 2005 the private equity
group at Goldman Sachs was working with the Danish
management team of the world's largest cleaning services company, ISS,
to arrange a leveraged buyout of their company. A
group of private equity investors had offered to provide DKK 9,675
million towards the purchase price, and there were sufficient assets to
support another DKK 7,693 million
of senior debt. The remainder of the purchase price, however, was to be
provided in the form of bridge loans. After initial discussions, a
syndicate of banks led by Citigroup proposed two bridge loan
facilities. Their intention was
that, within less than a year after the
buyout, one part of the bridge would be refinanced by issuing PIK
(pay-in-kind) notes, and the remainder with a high-yield bond issue.
Assignment:The management and sponsors were concerned about the cost of these loans, and about the uncertainty of refinancing them.
What was the initial cost of the bridge financing?
(b) Show, by means of a graph, how the costs of the bridge loans would change over time if they are not refinanced.
(c) What could go wrong with the refinancing of the bridge loans?
(d) What alternative, if any, does ISS have?